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INSURANCE NOTES

"Type II" Indemnity Clause Did Not Bar Contribution by Indemnitee's Own Negligence

11.20.2007

The decision in Edmondson Property Management v. Kwock, 67 Cal.Rptr.3d 243 (October 18, 2007), provides guidance to insurers whose insureds had agreed to indemnify another, as to whether the indemnity agreement precludes equitable contribution from a co-insurer.

In Edmondson, a personal injury suit was filed against a property manager and the owner of the property. California Capital issued a general liability policy to the owner. The property manager qualified as an additional insured under the Capital policy. Farmers Insurance issued a general liability policy to the property manager.

Capital alone paid the settlement of the personal injury suit and sought equitable contribution from Farmers. Farmers declined to contribute, arguing that pursuant to the indemnity clause in the property management agreement between the owner and the property manager, its policy must be treated as excess to the Capital policy. The trial court rejected Farmers’ argument and after a bench trial found that Farmers was liable for 50 percent of the settlement. Farmers appealed.

The Court of Appeal affirmed the trial court’s ruling, concluding that the indemnity provision did not bar contribution from Farmers. The Court of Appeal set forth a two-prong test for making the determination: (1) “what conduct or claims did the parties intend by their indemnity agreement to protect the indemnitee against”; and (2) “did the parties intend to make the insurance obtained by the indemnitor primary to any obtained by the indemnitee.”

To satisfy the first prong, the non-contributing insurer must establish the type of indemnity agreement at issue and that the indemnitee’s conduct falls within the scope of the agreement. For instance, a “Type I” indemnity agreement indemnifies the indemnitee for both “passive” and “active” negligence of the indemnitee. A “Type II” indemnity agreement indemnifies only for the indemnitee’s “passive” negligence. The Court explained that the non-contributing insurer must “prove that the indemnification agreement would bar any recovery between the insureds before it can successfully claim equitable contribution would negate the negotiated contract between the insureds.” As to the second prong, the non-contributing insurer must show that the indemnity agreement contains an express provision making the insurance obtained by the indemnitor primary. If there is no language in which the parties agreed to treat the indemnitee’s otherwise primary policy as being “excess” to the indemnitor’s policy, and thus requiring the indemnitor’s policy to pay first, the “general policy supporting equitable contribution trumps.”

In Edmondson, the personal injury suit involved a child who fell off a storage shed next to the apartment building owned by the owner. Evidence showed that the property manager knew that children had taken to playing on the roof and that the manager had previously told that particular child who was injured to get off the roof. As there was no language in the indemnity clause obligating the owner to indemnify the property manager for its “active” negligence, the agreement was a “Type II” clause and the property manager was not entitled to be indemnified for its own negligence. Farmers did not contest the 50-50 allocation by the trial court, and the Court affirmed the ruling that Farmers was liable for 50 percent of the settlement.

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